The LongRun Industry Supply Curve A normal good is being pro

(The Long-Run Industry Supply Curve) A normal good is being produced in a constant-cost, perfectly competitive industry. Initially, each firm is in long-run equilibrium. Briefly explain the short-run adjustments for the market and the firm to a decrease in consumer incomes. What happens to output levels, prices, profits, and the number of firms?

Solution

In the long run firms can easily enter and exit the market. A firm will remain in the market, if it earns economic profit above normal profits. Otherwise it will exit.

A Normal good is a good which behaves positively to income of the consumer. If the income of consumer increases, they will buy more of the normal good. If the income of the income of the consumer decreases, they will buy less of the normal good. The income elasticity for the demand of the normal good is positive.

If the income of the consumer falls -

The demand for the normal good will fall and demand curve will shift leftward. This will reduce the prices. Output will fall because quantity demanded have decreased. Profits will decrease because less is demanded and sold. The number of firms will decrease. If a firm is not earning economic profits it will exit the market.